Simple vs Compound Interest
Both grow your money — but compound interest grows it exponentially. Here's the difference.
Simple interest
Simple interest is calculated only on the original principal. It does not earn interest on previously earned interest. Formula:
A = P × (1 + r × t)
Example: $10,000 at 5% simple interest for 20 years = $10,000 × (1 + 0.05 × 20) = $20,000.
Compound interest
Compound interest is calculated on the principal and all previously earned interest. Formula:
A = P × (1 + r/n)n×t
Example: $10,000 at 5% compounded monthly for 20 years ≈ $27,126.
Side-by-side comparison
| Years | Simple Interest (5%) | Compound Interest (5%) | Difference |
|---|---|---|---|
| 5 | $12,500 | $12,834 | +$334 |
| 10 | $15,000 | $16,470 | +$1,470 |
| 20 | $20,000 | $27,126 | +$7,126 |
| 30 | $25,000 | $44,677 | +$19,677 |
| 40 | $30,000 | $73,584 | +$43,584 |
All examples use $10,000 initial principal.
Where you find each in real life
- Simple interest: Most car loans, some personal loans, certain bonds.
- Compound interest: Savings accounts, CDs, mortgages, credit cards, most investments.
Curious what compound interest could do for your goals? Try the calculator.